SENATE APPROVES FARM BANKING AID

By NATHANIEL C. NASH, Special to the New York Times

Published: December 20, 1987

WASHINGTON, Dec. 19—
The Senate approved a financial rescue package today that would inject $4 billion into the nation's network of banks that lend exclusively to American farmers.

By an 85-to-2 vote, the Senate passed a plan intended to revitalize the Farm Credit System, whose financial strength has been depleted by five years of depression in the farm economy and thousands of bankruptcies among the nation's farmers.

The House passed an identical bill by an overwhelming margin Friday.

Although some Administration officials said President Reagan had not decided whether to sign or veto the bill, others said it would be politically costly for him to withhold such assistance from farmers. Leahy Warns of 'Disaster'

''Without this legislation, we face the possibility of a financial disaster in the farm belt,'' said Senator Patrick J. Leahy, a Vermont Democrat and chairman of the Senate Agriculture Committee. He said such a situation ''could be devastating to confidence in our economy at this critical time.''

If Mr. Reagan signs the farm credit bill, the package will make new loans available for spring planting. This is particularly important since the farm economy has begun to turn around. Land and commodity prices are rising, giving farmers more of a chance to operate profitably.

In addition to injecting billions of dollars into the Farm Credit System, the bill would reorganize a network of 287 lending institutions that for years has been plagued by what some members of Congress have called adminstrative excess and questionable lending practices.

The $4 billion package marks the second time this year that Congress has had to pass emergency legislation to save a major sector of the nation's financial system from possible collapse. Last summer Congress approved a $10.8 billion plan to prevent the savings and loan deposit insurance fund from going bankrupt.

Both actions, plus the collapse of the stock market in October, underscore the strains on the nation's banks, brokerage firms and savings and loan institutions from the depressed energy, real estate and farm sectors. In addition to these domestic problems, commercial banks have come to realize that they will never collect on many loans to third world countries. Net Worth Has Dwindled

Even though it is costly, maintaining the Farm Credit System is considered both economically and politically vital, since its $50 billion in loans represents one-third of all lending to farmers. The system was created to direct credit to farmers seeking long-term loans to purchase land and shorter-term funds to finance equipment and seed purchases. Twelve Federal Land Banks provide the long-term loans, while 12 Federal Intermediary Credit Banks provide the shorter-term financing.

Since 1985, as land prices plummeted, the system has lost almost $5 billion from defaults on loans to farmers. Its net worth has dwindled to just above $1 billion.

And although Congress has felt the political pressure throughout the year to produce legislation to save the system, that pressure became even greater last week when, as predicted, the $2.4 billion Federal Land Bank of Jackson, Miss., declared itself effectively insolvent and froze the deposits that farm borrowers had placed with the lending institution. Selling Bonds to Investors

Unlike commercial banks and savings and loans, banks in the Farm Credit System do not take consumer deposits. Rather, borrowing farmers put up 10 percent of the value of their loans as a stock deposit in the bank. Those funds are returned only after the farmer has repaid all interest and principal on the loan. Moreover, to raise money for farm lending, the system issues long-term bonds to the public.

Under the legislation, whose formal name is the Agricultural Credit Act of 1987, the system would be able to sell $4 billion of 15-year bonds to the investing public over the next five years. In the first five years, the Federal Treasury would pay interest on the bonds. Over the next five years, the Farm Credit System and the Treausry would split interest payments, and the farm system would pay all interest in the five remaining years of the bonds' life.

Congressional aides have estimated that the overall cost to the taxpayer from the interest payments on the bonds will be about $1 billion.

The legislation also would establishe a three-member Farm Credit Assistance Board to oversee the financial rejuvenation of the system, and a Financial Assistance Corporation to sell the bonds. The Agriculture and Treasury Secretaries, as well as an agricultural producer appointed by the President and confirmed by the Senate, would make up the assistance board.

A lending institution seeking financial aid must present a plan for reorganization and be subject to salary cuts, management removal and other changes considered necessary by the assistance board.

Moreover, under the plan the Federal Land Banks and the Federal Intermediary Credit Banks would be merged to eliminate administrative overlap. Senator Richard G. Lugar, Republican of Indiana, estimated this duplication of effort costs the system $800 million a year.